C3.ai, Inc. (NYSE:AI) Q3 2024 Earnings Call Transcript
C3.ai, Inc. (NYSE:AI) Q3 2024 Earnings Call Transcript February 28, 2024
C3.ai, Inc. misses on earnings expectations. Reported EPS is $-0.60282 EPS, expectations were $-0.28. C3.ai, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the C3 AI's Third Quarter Fiscal Year 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amit Berry. Please go ahead.
Amit Berry: Good afternoon and welcome to C3 AI's Earnings Call for the Third Quarter of Fiscal Year 2024, which ended on January 31st, 2024. My name is Amit Berry and I lead Investor Relations at C3 AI. With me, on the call today is Tom Siebel, Chairman and Chief Executive Officer, Juho Parkkinen, Chief Financial Officer, and Hitesh Lath, Chief Accounting Officer. After the market closed today, we issued a press release with details regarding our third quarter results, as well as a supplemental to our results, both of which can be accessed through the Investor Relations section of our website at ir.c3.ai. This call is being webcast and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws.
These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion on material risks and other important factors that could affect our actual results, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at time, in our prepared remarks in response to your questions, we may discuss metrics that are incremental to our usual presentation to give greater insight into the dynamics of our business or our quarterly results.
Please be advised that we may or may not continue to provide this additional detail in the future. And with that, let me turn the call over to Tom.
Thomas Siebel: Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. C3 AI had a great third quarter. Total revenue of $78.4 million grew 18% year-over-year, exceeding the high end of our guidance range. The total number of customer engagements was 445, an increase of 80% compared to 247 a year ago. Subscription revenue was $70.4 million, constituting 90% of total revenue and increasing 23% from a year ago. Non-GAAP gross profit was $54.7 million, representing a 70% gross margin. Our GAAP operating loss was $82.5 million. Our non-GAAP operating loss was $25.8 million. Better than our guidance for a loss of $40 million to $46 million. Our non-GAAP net loss per share was $0.13. We ended the quarter with $723.3 million in cash, cash equivalents and investments.
All these numbers exceeded our guidance and exceeded analysts' consensus. This is the 13th consecutive quarter as a public company in which we have met or exceeded our revenue guidance range. None of this should have come as a surprise. The enterprise AI market is on fire. We have been predicting for some years that the market for enterprise AI would be quite large. Those predictions were subject to much speculation in the analyst community and media. As of February 2024, I believe it's broadly resolved that the enterprise AI market opportunity is substantially larger than anyone predicted, constituting a secular change in the composition and growth rate of enterprise software writ large. Cloud infrastructure is scaling rapidly, NVIDIA grew 265% year-over-year.
NVIDIA's data center GPU sales grew by 409% year-over-year. Now, some believe that this capacity is being built to use LLMs to write Christmas cards in the style of Charles Dickens and write college application essays to Yale. But that's simply not the case. This capacity is being built to run enterprise AI applications, stochastic optimization of the supply chain, supply network risk, predictive maintenance, demand forecasting, fraud detection, production optimization, customer engagement, predictive medicine, precision medicine, and government services. And that is what we do at C3 AI. So as we power into 2024 and 2025, the world is very much coming our way. C3 AI has been preparing for this enterprise AI market explosion for 15 years. We started in 2009 at the infancy of AWS.
This is before Azure and before Google Cloud even existed. We carefully designed, developed and tested a reference AI software platform architecture now known as the C3 AI platform. We then used that platform to design, develop and bring to market over 45 production enterprise AI applications, that address the value chains of manufacturing, financial services, agribusiness, chemicals, lumber, paper products, utilities, oil and gas, state and local government, defense and intelligence. The market for enterprise -- the market interest in enterprise AI is staggering. Virtually all commercial, military and government organizations are focused today on leveraging AI to improve their operations, optimize their processes and transform their businesses.
Our qualified opportunity pipeline has increased by 73% from a year ago. Now this is led by C3 Generative AI opportunities. Our go-to-market with partners is driving strong pilot additions, and it's still in the earliest innings. In the third quarter, we closed 62% more bookings with our partner network than we did in Q2. 337% more bookings than a year ago. Bottom line, the market demand for enterprise AI products is overwhelming. Customers. In the commercial sector. In Q3, we signed new agreements with Boston Scientific, Pantaleon, Booz Allen, Southwire, Carpenter Technology, Florida Crystals, Santa Ana Agriculture, Cerveceria Guatemala, AbbVie, T-Mobile, Bloom Energy, Ball Corporation, DLA Piper, Carlisle Companies and Holcim among others.
Holcim, a European leader in sustainable building solutions, embarked upon a production pilot with C3 AI beginning in May 2023 to configure and deploy the C3 AI reliability suite. Following a successful six-month pilot Holcim entered into a four-year subscription agreement with C3 AI to scale the reliability application across its in excess of 100 cement plants. Holcim's predictive maintenance program monitors a large number of assets and will generate significant yearly economic value in reduced maintenance costs and production increases. Holcim is also implementing C3 Generative AI to enrich the reliability application and to assist with complex machinery troubleshooting. Another example, DLA Piper, a global law firm pioneering technology innovation in the legal sector worked with C3 AI to create a first of kind generative AI application to streamline the analysis of complex legal agreements.
In just three months, DLA Piper applied C3 Generative AI to reduce the attorney time it takes to create over 200 point due diligence analyses of limited partner agreements, and it reduced the effort by 80%. As a result of this application, DLA Piper is realizing new operational efficiencies and freeing up their attorneys' time to focus on delivering increased value to their clients. State and local government had a huge quarter, generating 29% of our bookings. Lighthouse agreements with San Mateo County, Daily City and Riverside County, California are spearheading growing awareness for our state and local government suite of applications and we're now closing deals nationally. We see a huge potential to expand our footprint through the counties, cities and municipalities across the United States.
San Mateo County Sheriff's Office and the Daily City Police Department both signed multiagency expansion contracts for the C3 AI law enforcement application as a countywide crime investigation platform to combat organized retail, vehicle and cargo theft. This contract involves a combined 15 local police departments and 16 agencies deploying the application in coordination, including Burlingame, Daly City, the City of San Mateo, San Bruno, Atherton, Redwood City, South San Francisco, Menlo Park, Foster City, Belmont Pacifica, East Palo Alto, Colma, Broadmoor, Brisbane and others. These deployments promised to significantly decrease the investigative timelines to solve crimes and empower multi-agency collaboration to help prevent crime. These engagements were funded through the Organized Retail Theft grant from the California Board, the Board of State and Community Corrections.
And by the way, of all the submissions to this board, San Mateo County submission ranked number one in priority as the best submission in the state with C3 AI law enforcement being the top investment in their initiatives to combat retail theft in the State of California. We also executed an agreement, actually multiple agreements with San Mateo county, to deploy C3 AI Property Appraisal, C3 AI Law Enforcement and C3 Generative AI applications, the assessors and county clerks, recorders and elections office licensed C3 AI Residential Property Appraisal and C3 AI Commercial Property Appraisal to kind of monetize the appraisal of over 230,000 parcels each year, constituting more than $300 billion in assessed property value. And to do this more accurately, more expeditiously and more defensively.
Our US federal business continues to show significant strength. Third quarter revenue was up over 100% year-over-year, and bookings were up 85%. We signed new and expansion agreements with the Missile Defense Agency, the Department of Defense, the United States Air Force, and the US Intelligence community, including seven new generative AI agreements at the Missile Defense Agency, the United States Air Force, JROC, and the US Marine Corps. We have a really substantial growth opportunity in federal and we're laying the groundwork to seize it. We're getting strong traction with partners in this federal space, not the least of which is AWS. We've deployed our federal solutions on the AWS marketplace for the US intelligence community in June of last year, and we're basically on speed dial collaborating with AWS federal executives every day in the defense and intelligence communities.
Additionally, and importantly, we entered into an enhanced partnership agreement with Paradyme. This is a high-end professional services organization in the federal sector, and we did this to increase our capacity for deploying appropriately cleared data scientists and application engineers into our classified government installations. We've aligned with Paradyme and our commitment to support the defense intelligence communities in their critical missions related to national security. Under the new agreement, Paradigm will significantly grow its number of dedicated C3 AI staff to accelerate joint selling and to accelerate the delivery of these secure, classified, and powerful AI applications, providing predictive insights into these federal agencies.
In addition, Paradyme would jointly mark up the C3 Generative AI for defense application and the C3 AI law enforcement applications. I want to highlight the continued diversification in our go-to-market efforts. Our business continues to diversify across industries. In the last quarter, Q3, our bookings distribution by industry was 29% state and local government, 25% federal defense and aerospace, 16% manufacturing, 11% agribusiness, 8% chemical, 7% professional services, 2% energy and service utilities, 1% food processing and consumer packaged goods, and 1% oil and gas. Now let's take a minute and this is important. So please pay attention and look at the evolution of our go-to-market model. And I want to particularly talk about the transition to consumption-based pricing.
You'll recall that six quarters ago, we changed our go-to-market model from a leading with a subscription-based pricing model to leading with a consumption-based pricing model. The general idea being that rather than people licensing $10 million, $20 million, $30 million, $40 million, $50 million upfront, they would simply do a project, a pilot project, for say, $0.5 million for six months and we'll bring the predictive maintenance application, the supply chain optimization, the demand forecasting application, whatever it may be, into full production in six months and then the customer will offer $0.5 million, which is insignificant. And if the customer likes it, they could keep it. And they pay depending upon the volumes, you generally $0.40 to $0.50 per BCP or to run the application.
Bring it live, if you like it, keep it. That was the idea. And this clearly and substantially lowered the price barrier for companies to engage with us. And we've seen this now in the number of deals that we close each quarter, the size of the transaction that we're doing, it's been very effective. So this model has been and continues to be very successful in driving engagement. And our contract volume has grown as we expected. Now, that time we provided expectations of VCPU consumption ramps, pricing and pilot conversion rates. And now we've compared this to the empirical data that we've realized over the past four quarters. And it turns out those initial assumptions have been proved to be quite accurate. Our estimates on VCPU usage and how that ramps.
How that ramps say over four, five, six, seven, eight quarters. They're pretty darn accurate. I would say that plus or minus 10% it's about right on. We assumed a pilot conversion rate of 70% and what we're seeing that appears to be about right. We're also pleased to share that the pricing on the converted pilots is pretty much in line with our expectations. Now, when we began the transition, we assumed that virtually almost all pilots actually would convert to month-to-month pay as you go consumption-based pricing. Counter-intuitively, it hasn't quite worked out that way. And the empirical data show that the majority of our customers are choosing to sign multi-year subscription contracts rather than after the trial they have the option and they're choosing to sign multi-year subscription contracts rather than month-to-month pay as you go, and so why are they doing that?
After pilot completion, many customers are electing to deploy multiple applications across multiple business units, and they're electing for a multi-year subscription -- committed subscription pricing model as it offers them a more predictable cost model at large scale. Now note also it's not quite this simple for those that you're working on models, because that subscription agreement also involves a consumption runtime component. So this is not going to be easy to model people for those who are working on your spreadsheets. Now the good news is that our customers are making significant commitments to C3 AI and our multi-year subscription agreements are a positive indicator of the depth of their commitment. Also our data shows that over the term of the contract, the revenue from these subscription agreements is generally equal to the revenue from our consumption agreements.
So whatever the customer chooses is fine to us because it's revenue neutral over, say, 10 to 12 quarters. Bottom line, our go to market transition is working, as evident from the growth of our opportunity pipeline, the increase in our customer engagements, and increased revenue. Now, let's take a minute and talk about generative AI. Because this is a very significant market development. The opportunity ahead of us in generative AI is enormous. C3 AI has been at the vanguard of enterprise AI innovation now for 15 years. We've spent 15 years building enterprise AI applications for manufacturing, supply chain, demand chain, finance, defense intelligence, smart grid, oil and gas, et cetera. In all fairness, we largely established the enterprise AI category.
Now, with the advent of generative AI, I mean, this is fundamentally changing the nature of the market. It's changing the nature of the human computer interface. It's unlocking new use cases and it's breaking, and it's creating kind of breakthrough opportunities for nonobvious applications in new industries and enterprises that we would not have expected and we're just in the earliest days of this. Gartner predicts -- Gartner Group predicts that by 2026, over 80% of enterprise will be using generative AI, including the deployment of generative AI enabled applications in their production environments. This is up from basically zero in 2022. For Gartner, organizations, this is a quote that do not consistently manage AI risks are exponentially inclined to experience adverse outcomes such as security failures, financial and reputational loss, loss and social harm.
We are leveraging our first-to-market advantage in scalable trusted enterprise AI to bring secure, deterministic, hallucination-free, traceable, domain-specific generative AI solutions and generative AI augmented applications to market. And we're seeing a groundswell of interest in all of our generative AI offerings and our remarkable uptake of the C3 generative AI suite. Our generative AI customer activity has ramped sharply since we introduced this product to market four quarters ago. We're now applying generative AI in a kind of areas where we wouldn't have expected the operator assistance in a major manufacturing facility, customer assistance at a global financial services company, and field technical support at a major multinational manufacturing group.
DLA Piper is using generative AI to significantly reduce the labor associated with limited partner agreement due diligence. Another leading law firm is using the corpus of S1s that are contained in sec.gov to train a large language model to reduce the attorney labor in generating first drafts of S1s for IPO candidates. I mean, imagine you train a large learning model on the corpus of S1s in sec.gov, and then you want to come up with your first draft of your S1 if and when the IPO market opens again. And you put in the name, address, the finances, the key risk factors, hit the carriage return, and you know it was so facto. You know, the first draft of the S1 is there. And we've saved, you know, god knows how many person weeks of legal associates where now they can just edit and get it done.
So it's really, this is pretty neat. Baker Hughes is using C3 generative AI on top of Workday and ServiceNow to provide its global employees broad and immediate answers to all employee questions about, you know, employee questions, policies, benefits, compensation, what have you. Riverside County in California is using C3 generative AI to assist their staff in answering questions about citizen questions, about taxation, zoning, building codes, et cetera. We continue to be really impressed by the broad range of applications to which this generative AI technology is applicable. In Q3, we closed 17 generative AI applications pilots across a broad range of industries, including federal, defense, aerospace, ag, forestry, food processing, manufacturing, state, local government, chemicals, life science, and others.
And these generative AI pilots spans Europe, Latin America, North America. There are no bounds to this. We continue to drive innovation in the generative AI market with our highly differentiated C3 generative AI solution. Our newest innovations include omni-modal data support. You've heard about multi-modal. Well multi-modal doesn't cut it. Multi-modal includes text and images. That doesn't get you very far. You need enterprise data, ERP, CRM, OSI-PI data, telemetry, images, text, photos, voice. So in order for this dog to hunt, it needs to, you know, multimodal doesn't get you anywhere. You need omni-modal data support, which is what we support in the C3 AI product today. We have advanced parsing and embedding capabilities to increase reasoning on tables and images within documents.
We have the planning and execution of complex multi-step workflows, which are multilingual support, and the automatic invocation of advanced math tooling. We do this in a manner that is virtually hallucination-free and it's LLM-agnostic. So it's -- our solution here is really quite unique and it's getting a lot of traction and we are installed today in some of the most secure installations on the planet Earth. Earlier this year, I'd actually asked when we announced in last quarter's conference call, we made a well-considered decision to accelerate our investments in generative AI to seize market share in this large and rapidly growing market opportunity. As a result of that investment last quarter, our web page views are up 57% year-over-year in Q3.
Our organic search traffic is up 68%. And our unique visitors to our website are up an eye popping 230%. So this decision is already accelerating our business, already accelerating our product innovation, and it's driving definitely broader market awareness of what we do in enterprise AI and in generative AI. That being said, we continue to expect that we will operate a positive free cash flow business in Q4 in the next quarter. Now, while we're not giving fiscal year '25 guidance yet, we will continue to expect positive free cash flow for the full year of fiscal year '25. Talk a minute about our International Users Group Conference C3 Transform. We'll be holding our Fifth Annual International Users Group Conference C3 Transform in Boca Raton next week, March 5th through 7th.
Over 500 customers and partners are registered to attend, including leaders from almost every industry sector. General sessions on March 5th and 6th will be substance packed, including C3 AI product roadmaps, C3 AI customer success stories, best practices in enterprise AI from C3 AI customers and partners, AI innovation in defense and intelligence, and discussions from experts about the past and future of generative AI. And I'm very pleased to announce that the C3 Transform General Sessions will be simulcast to qualified investors and analysts and those of you who are interested can register online beginning this Friday and tune in real time to participate in any of those general sessions that you would like. And I think you'll find them, these are not cheesy sales pitches, folks.
This is pretty substantive stuff. And for those of you who are either interested in C3 or interested in AI in general, I think you'll find it, you know, we hope you'll join us and you're welcome to. In conclusion, business is good, prospects look bright, and C3AI has returned to accelerating growth. Talk about guidance. So given current market conditions, we are increasing revenue guidance for Q4, and for fiscal year, this fiscal year, 2024. For Q4, we're anticipating revenue in the range of $82 million to $86 million, and for the year, we're anticipating revenue in the range of $306 million to $310 million. Our non-GAP loss from operations is expected to be in the range of $43.5 million to $51.5 million for the quarter. And our non-GAAP loss from operations for the year is expected to be in the range of $115 million to $123 million.
Now let me turn the call over to my colleagues, Juho Parkkinen, the Chief Financial Officer, and Hitesh Lath, the Chief Accounting Officer for additional detail. Juho?
Juho Parkkinen: Thank you, Tom. I will now provide a recap of our Q3 financial results and some additional color on pilot activity. Then I'll discuss factors that would drive our financials in Q4 and in FY'25. All figures are non-GAAP unless otherwise noted. Total revenue for the third quarter increased 17.6% year-over-year to $78.4 million. Subscription revenue increased 23.4% year-over-year to $70.4 million and represented 89.8% of total revenue. Professional services revenue was 8.0 million and represented 10.2% of total revenue. Gross profit for the third quarter was 54.7 million and gross margin was 69.7%. As a reminder, we continue to expect short-term pressure on our gross margins due to higher mix of pilots which carry a greater cost of revenue during the pilot phase of the customer lifecycle.
Also, as we discussed last quarter, We expect short-term pressure on an operating margin due to the investments we're making in generative AI and upgrading customers to our platform version 8.3. Operating loss for the quarter was negative 25.8 million compared to our guidance range of negative 40 million to negative 46 million. The improvement in operating loss versus guidance was driven by our team's ongoing focus on disciplined expense management, as well as the timing of additional investments we're making to capture market share. At the end of Q3, our accounts receivable balance was 173.5 million, including unbilled receivables of 102.6 million. Total allowance for bad debt remains low at 400,000, and we have no concerns regarding collections.
The general health of our accounts receivable remains strong. Six quarters ago, we announced a transition from subscription-based pricing to consumption-based pricing, a standard in the industry. We anticipated and announced that this transition would have a short to medium term negative effect upon revenue growth and RPO as the average sales price was significantly reduced and the contracts often lacked a time certain multi-period commitment. As the transition progressed, we expected to return to revenue growth as customer engagements accelerate and customers expand their consumption. Reflecting our transition to a more consumption-based contract, we reported third quarter GAAP RPO of 186.9 million, which is down 28.8% from last year and current GAAP RPO of 172 million, which is down 2.4% from last year.
Free cash flow for the quarter was negative 45.1 million. We continue to be very well capitalized and closed the quarter with 723.3 million in cash, cash equivalents and marketable securities. Now I'll provide some additional metrics for the third quarter. During the quarter, we started 29 pilots, a 71% increase from last year and down 19.4% from last quarter due to timing of the sales activity. 10 industries were represented in our pilot starts. At quarter-end, we had cumulatively signed 138 pilots, of which 132 are still active. This means they're still in their original three to six month term, extended for some duration, converted to consumption or a license contract or currently being negotiated for a production license. Our customer engagement count for the quarter was 445, an 80.2% increase from 247 a year ago.
As a last item on our call today, I wanted to inform you that after three wonderful years at C3 AI, I will be stepping down as the company's CFO and assuming a role as VP of Finance. I have been at C3 AI for three amazing years and two of its CFO. I'm grateful to Tom and the Board of Directors for the opportunity. It has been a privilege to work beside Tom and the entire executive team in this role. As you all are aware, C3 AI is a unique hyper-performance technology company. 100% in the office, incredibly hard working fast paced. You have to be on 150% all the time. And for me personally, I need to take a break and step aside for a bit and spend more time with my family. I am pleased to inform you that my colleague Hitesh Lath is assuming the role as CFO.
I hired Hitesh about three months ago as our Chief Accounting Officer. Hitesh comes to us from Ernst & Young, where he was a partner for over eight years and brings a total experience of 24 years spent serving large multinational technology clients. I've known Hitesh for over a decade, and in fact, when I was at Ernst & Young, I worked for him at some of the engagements. From day one, Hitesh jumped right in and was heavily involved in preparing the financials for this quarter, and I'm very excited to hand the finance team into Hitesh's capable hands and expect him to continue the progress we have made and take the team to new heights. I will remain a C3 AI employee, advising Hitesh and Tom and assisting the team as necessary to make sure our operations are smooth and our financial reports continue to be pristine.
Hitesh, would you like to say something?
Hitesh Lath: Thank you, Juho. I have been here at C3 AI for about three months. And I'm very excited to take on this role. These are great times for AI and for C3 AI. And I look forward to working with Tom and rest of the executive team and be a part of the growth story. With that I'd like to hand it over to the operator for Q&A.
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